Unity Software Inc

NYSE:U

Earnings Call Transcript 2021-Q3

[Operator]

We are live.

[Richard Davis, Vice President Investor Relations]

Okay, great. Well, thank you, everyone and welcome to this call to discuss our Third Quarter earnings results and the acquisition of certain assets of Weta Digital. With me today, are John Riccitelo, President and Chief Executive Officer, and Executive Chairman, Luis Visoso Senior Vice President and Chief Financial Officer, and a new participant to our calls, Mark Witten, Senior Vice President of Create solutions. As you've seen from the press releases, we have a lot of good news today and we will go through our updates and then straight into Q&A after that. But before we start, I'll run through our Safe Harbor statement. So I'd like to remind participants that during this conference call, we will be making forward-looking statements, including statements about goals, business outlook, industry trends, market opportunities, expectations for future financial performance and similar items, all of which are subject to risks, uncertainties, and assumptions.

But you can find more information about these risks and uncertainties in the Risk Factors section in our filings at sec.gov. And we remind everyone that our actual results may differ and we undertake no obligation to revise or update any forward-looking statements. And we will also be discussing non-GAAP financial measures today, reconciliations between our GAAP and non-GAAP financial results, and a discussion of limitations of our non-GAAP financial measures can be found in our earnings press release, which was issued earlier today and is available on our website under the Investor Relations tab. Now, with that, let me turn the call over to John.

[John Riccitiello]

So thanks Richard and thank you [Indiscernible]. We are really happy with our third quarter results and we have great news to share. We reported another strong quarter with results well above our expectations, we delivered 43% revenue growth as revenue hit a record $286 million in the quarter. We continue to invest to drive future growth resulting in a non-GAAP operating margin of a -4% flat to the same quarter last year. Since we went public in September last year, our revenue growth has averaged 45%. We're encouraged by the execution loss across all of our business clients and geographies. And as you will hear later from Luis, we're raising our revenue guidance again, this quarter. We have even more exciting news. We've entered into a definitive agreement to acquire Weta Digital, specifically its award-winning engineering talent, artist pipeline tools, and technologies.

Weta Digital will become part of Unity Create Solutions led by Marc Whitten and will focus on bringing dozens of artists tools inside of Weta to a much broader world of VFX artists across many companies onto the gaming industry and to users across many industries. The academy award-winning VFX teams of Weta Digital will continue as a standalone entity called Wedge Weta FX and is expected to become Unity's largest customer in the media and entertainment space. We are thrilled to democratize Weta's industry-leading tools and bring the genius of Peter Jackson and Weta's amazing engineering talent to life for artists everywhere by combining the power of Unity and Weta Digital, the tools and technologies that build characters in scenes from the world's most iconic films such as Avatar, Lord of the Rings, and Wonder Woman, we will be able to enable an entirely new generation of creators to build, transform, and distribute stunning real-time 3D content.

Now, until now, Weta's tools were used exclusively in-house at Weta VFX. We plan to take these tools to artist and creators across the film industry, the gaming industry, from end-use to triple A games into other industries such as automotive, architecture and e-commerce. We plan to offer a cloud-based version of Weta for the millions of consumers who generate content every day on social and gaming platforms and on the web, or to use the current binocular, the metaverse. In addition, Weta has done thousands of digital assets such as fully formed characters, skins, trees, houses, automobiles, fire trucks, many things. We plan to offer these objects as a content library where creators can import these digital assets into our editor and apply physics, volumetric lining, and sound [Indiscernible].

In summary, we plan to do what we do best, create and develop amazing technology and tools that can easily use and available to a wide spectrum of users for technical experts, to consumer hobbyist. And you've heard me say this many times before, we believe the world is a better place with more creators in it. And Luis and Mark will provide additional details. Here, I'll provide a summary highlight picture. We expect the purchase price of $1.625 billion to be immediately accretive and we will be even more so, as we bring these tools to your customers. Our acquisition of Weta is expected to open new markets and accelerate our product more back for artists by years.

Based on internal models, we estimate that this transaction expands our total addressable market by over $10 billion, while meaningfully increasing the percentage of the addressable market, the Unity can serve us. I would like to welcome everyone at Weta Digital on behalf of everyone at Unity. I believe you'll feel at home at Unity. I also want to thank the Weta VFX team for the partnership to get this deal done with year-to-date will be honored to have Weta FX Peter Jackson, Prem Akkaraju, Joe Letteri and the entire organization as a key customer. We love your work. I look forward to many years of strong partnership. And with that, let me turn the call over to Luis.

[Luis Visoso]

Thank you, John. Definitely an amazing quarter. I will start with our earnings results and then share additional perspective on the Weta acquisition. The Unity team delivered another strong quarter in which we exceeded guidance and street expectations. Here are some of the key financial highlights for the quarter. Total revenue of $286 million increased by 43% as compared to the third quarter of 2020. Operate delivered another very strong quarter with 54% year-over-year growth. Create accelerated in the third quarter and delivered 34% year-over-year growth. We delivered another non -- another strong non-GAAP gross margin of 81% up from 79% last year. We generated a non-GAAP operating loss of $12 million compared to $8.4 million the prior year. Free cash flow was $34 million for the quarter, bringing our year-to-date free cash flow to negative $100 million, which includes approximately $50 million in charges from [Indiscernible] dispute which we reported last quarter.

We continue to expect to break even on our free cash flow basis within fiscal 2023. We're encouraged by the strong continued customer success this quarter. Our dollar base net expansion rate for the quarter was a 142%, and customers generating more than a $100,000 annually, expanded from 739 a year ago to 973. Here are some of the key highlights for the quarter. Operating performance was very strong across [Indiscernible] and multiplayer services, which includes hosting service, voice, and community tools. This quarter, Unity has supported partners like Warner Brothers games, Jam City, and Miniclips, and games such as CrazyLabs, Super Stylist, and Dream Games Royal Match, where we deliver outstanding results at scale while navigating the challenges from iOS 14 and in multiplayer with supporting the launch of some exciting new games such as Team17 Worms Rumble, and Amazon Game Studios, New World.

In addition, we announced some important additions to make our Operate platform even more compelling. We launched Unity Game Services, or UGS, this quarter, with some more than 5,000 sign-ups in the 1st 10 days. This is a new platform experience for developers that unifies Unity's existing operating solutions for games, and introduces new tools and services that are designed to simplify developers ability to launch cross-platform multiplayer games. We also launched Unity Mediation, which includes waterfall and bidding within Unity Ads. In Mediation offerings are designed to help developers feel additional strong revenue streams by easily optimizing demand for their best performing ad performance and network partners. Within the same editor and interface, they build and manage their games experience. Create delivered 34% revenue growth for the quarter as we accelerated from the prior quarter.

Our games business continues to perform strongly with growth across geographies and customers as we build -- as we continue to add seats. We won several deals in the industry machineries space. A good example is a deal we closed with a manufacturer of commercial-grade farming equipment, where our more immersive and interactive real-time 3D capabilities enabled us to win their product configurator business. And there is much more to come. We're working on several digital twin projects that arrange from large objects, think cities, and buildings; to small objects, think shoes, watches and other consumer goods. We'll keep you posted as we make progress. And finally, we officially announced that we're going live with Medicare.

This is Unity's first real-time 3D sports platform, for creating and delivering interactive content directly to the consumer, launched in partnership with the UFC; the leading mixed martial arts organization. Together, Unity and UFC, we collaborate on research and development of potential applications for Unity, Americas within UFC. We are encouraged by this partnership and long-term potential. We do not expect meaningful revenue in the short-term from this partnership. Now onto guidance, we're entering the fourth quarter with very good momentum. We're guiding revenue of $285 to $290 million which represents 29% to 32% year-on-year growth. For the full year, we're again raising our guidance this time to $1.08 billion to $1.085 billion or 40% year-over-year growth. This represents an increase of $25 million on the high side of the range from our previous guidance.

We expect non-GAAP operating loss from operations of $20 million to $25 million for Q4 and a $59 million to $64 million for the full year. We're forecasting $329 million fully-diluted shares. I will turn it all -- turn the call to Mark Witten to go into the Weta acquisition in more detail. Mark runs Create Solutions at Unity. As you know, Create Solutions includes the Unity engine and a LiDAR, the tools and services we used to deliver digital twins for other industries, and our worldwide sales and professional services. Create is also our home for artist tools including ArtEngine, Pixyz, and SpeedTree, now foundationally anchored by Weta Digital. Marc joined us at nearly a year ago from Amazon, where he oversaw product execution and the delivery of entertainment to over 100 million active users on Fire TV, Fire Tablet, Kindle, Luna, and Amazon App Store. Prior to that, Marc was one of the creators of Xbox and Xbox Live, ultimately serving as the Chief Product Officer for Xbox and leading Xbox Live for many years. Marc, over to you.

[Marc Whitten, Senior Vice President of Create solutions]

All right. Thanks, Luis. And thank you, everyone. It's a pleasure to be with -- on this call with you. Before I start, I want to welcome everyone that's listening from the Weta Digital TV. Welcome to the Unity family. And everyone from Weta Effects, it's an honor to partner with you. It's an exciting time for Unity as even more so today with new markets that Weta opens for creators. I'll walk you through some of the things that make us the most excited about bringing on-board the Weta team and the amazing technology they built. But as the saying goes, a picture, or in this case a brief video, is worth 1000 words.

[Unidentified Speakers, Company Participant]

The new era of creativity is really something bigger than it's ever been before. Unity's really been focused on this mission that the world is a better place with more creators in it. But what we see now is that there is a new-generation of creators that are going to want to imagine even more in rich 3D experiences. Avatar, or Lord of the Rings, or Wonder Woman wouldn't have been possible without what is tools and the great artists behind them. We knew that digital effects offered so much possibility for us to be able to create the worlds and the creatures that we were imagining. Now, we're taking those tools that we have created an handing them over to Unity to market them for the entire world. Altogether, Unity and Weta Digital can create a pathway for any others from any industry who will now be able to leverage these incredible creative tools.

Now those tools will escape the Weta world and they'll be available to everyone. We see that being used in just about every industry you can imagine from retail to medicine, to film and TV, and gaming of course. I think for a generation to come, Weta is going to be one of Unity's most important partners and probably our greatest source of inspiration. Offering you an aspiring creatives [Indiscernible] the Weta Digital 's technology will be game-changing. We're incredibly excited to continue that deep partnerships where we work with them as they are working on their next movies, as they continue to create. The real magic here is what both of us are each also independently great at. What we do the best is where we make incredible VFX shots and animation clips for film and TV. And we're going to be great uptake all of that innovation and make it accessible to a much broader set of creators around the world.

[Marc Whitten, Senior Vice President of Create solutions]

All right. So beauty editor, which the core of our create businesses historically focused on, two broad categories of users, developers A-code, and artists who can code. One of our key strategies is to bring more artists to our platform by making our editor easier to use. Integrating machine learning-based productivity tools like automatics and operating specialized RSV tools like speed treat. We're entering a period of what we believe will be unprecedented growth in demand for great 3D content. The starts with movies, TV, and short-form video. Thanks to the rise in streaming, we are in a golden age of content. And with content, comes the need for deep VFX capabilities. Take Marvel and their growth from a couple of movies a year to the addition of dozens of hours of amazing quality television. We see no end to this hunger for great content In games, 3D has been the standard for years. But on every platform, the capabilities to deliver higher and higher quality content are only increasing.

And of course, there's the need for 3D content in every industry: in AR and VR, in virtual worlds, and much more. Whatever the word metaverse means, it's going to be built by millions of content creators, and we're on a mission to give them the easy-to-use and high-performance tools that will bring their visions to life. Weta Digital accelerates this mission by years, bringing an incredible team to join ours. This is an incredible cohesive pipeline powered by dozens of amazing tools. Each of these tools is impressive on its own. But as a consistent pipeline, they represent the most complete tool chain for 3D visualization ever created. As we've spent time working with Weta Digital we were consistently blown away by these tools. Manuka is a revolutionary, physically-based render that delivers unsurpassed visual fidelity.

Lumberjack and Totara enable building unprecedented environments that feel lived in, all through intuitive artist controls. With Barbershop, ours can groom hair and fur with the ease of a hairstylist, all the while creating powerful hierarchies of guide hairs scaled out to hundreds of thousands of individual hairs, resulting in the most artist-directable grooms. Loki is a simulation engine par excellence, able to perform huge, stable controllable, and predictable simulations with outstanding complexity and results. Whether you want to create intense explosions, turbulent oceans, flexing muscles, or anything else that you can dream up. Koru is a super high-performance rigging evaluation engine that automatically optimized informations for faster artist feedback.

For every type of content creation need, Weta Digital has created tools that help artist to be productive quickly. Hair, Barbershop, feathers, ATRIX, cities and environments, City Builder and scene designer, vegetation, Lumberyard and Totara, on and on. Even when we look at the production management tools. HiDef and ShotSub for instance, we found them to be built with capabilities beyond other tools that were available. This is an incredible collection of tools in which Weta top engineers invested more than 500 person years of engineering times developed their amazing and they are unreplicable in any reasonable time frame. But again, each of these tools is part of an integrated pipeline. And that's the key for us as we work to productize the collection as a cloud service.

By being deeply integrated, an artist can move from tool to tool and get consistent, coherent results. More importantly, groups of artist can collaborate together in different tools, all with one source of truth. These tools have been pressure-tested by hundreds of productions and are able to produce great results predictively no matter the complexity. This is approach that has powered Weta Digital success and why we're so excited to welcome the new Unity and enable millions of other creators through this pipeline. Going forward, we'll continue to provide these tools, Peter's creative teams at Weta FX, as the customer. And at Unity, we will learn and benefit from the years of experience that these close to 300 Weta Digital engineers bring with them. We believe this deal is a massive win-win, because Unity will be able to bring to bear the expertise to package and bring these tools to artists around the world, and that means not just the VFX industry, but games and real-time 3D verticals and overtime consumer creators.

We don't have enough time on this call to give you the full sense of the power, sophistication, and forward-thinking that Weta's engineers put into building this suite of tools. And I want to double-click on just one tool, City Builder, because it's a template for what we plan to do with several other Weta tools. Cities require scale, an immense amount of details. Yet, humans have resolved to quickly synced patterns, to create an interesting and believable city scape, that means you can't just repeat the same object every fourth house. Real cities also have an organic life, they evolve. They are how they are because of the unique circumstances that geology, the time and much more that have driven their growth. That's where City Builder comes in. City Builder procedurally generates rules and provides artists directable, easy-to-use controls that let them shape the resulting city scapes. An artist can drag a river through or along the city and immediately see how that river would impact the layout of markets or buildings and whole sections of the daily life.

Any change in artist-make changes how the rest of the city behaves. And this in turn makes environment artist, modelers, layout artists much more productive in their work. Many of Weta Digital design tools, City Builder included, require cross-disciplinary models that span light, sound, heat, and motion physics, but also embed advanced algorithms from computational fluid dynamics, finite element analysis, and machine learning. That's a compelling value proposition for anyone creating this kind of content. And whether you're a creator for the highest-end massive world or an Indie who just wants to create a street or room, our vision is the tools like City Builder delivered through the Cloud, help anyone get to the next level of productivity and creativity. Of course, Weta operates in an ecosystem of other 12 inventors.

We're excited to continue to work with companies like Autodesk, Adobe, and side effects and more. We plan to launch a suite of our tools as plug-ins directly into the creation suites that artists use every day, making it easy for them to get the full power from these amazing tools. And we'll also be populating our content library with some of the content created from the masters at Weta FX. So use the canvas you already know and love, get access to incredibly powerful tools used in movies like Avatar and Avengers, and get incredible content from our content library to fulfill your vision. Parallel with those efforts, we will work to make Weta Digital technology more applicable to a broad customer base. Upgrading the user interface, the workflows, and involving Weta tools into the Weta cloud, and bringing them to real-time used cases like games, including leveraging Parsec's incredible streaming capabilities to drive low latency, high fidelity, rich input on any device anywhere.

We believe that these enhancements will open new markets for us, not just a thousands of artist, but if we expand into the prosumer market, millions of creators. With the great teams already at Unity, the great teams from Parsec, SpeedTree and Artomatix, and now with team Weta Digital, we plan to win with artists at scale, high and low, VFX gains, industrial use cases and more. Let me turn the call over to Luis, who will provide the financial details of the Weta transaction. But before I do, I can't help myself, there's one more quick video speaking to the power of Weta tools and how they enable the incredible VFX we have come to expect. I'm thrilled to welcome the incredibly talented engineers, scientists, and graphic experts at Weta Digital Unity. I'm honored to work closely with the amazing artists of Weta FX.

[Unidentified Speakers, Company Participant]

When you're making a film, every piece has to work. The thing that you know about visual effects is, if a shot fails, you lose your audience. The world-class team at Weta have created stunning visuals, using state-of-the-art suite of artist tools. And they have won 6 Academy Awards. Each Weta tool has been created to make the best way to create content for each specific team. These tools surprise every time with their power, their flexibility, their sophistication. We've got years and years of visual effects experience that has been dedicated really towards creating films like Lord of the Rings, like King Kong, like The Hobbit, like Avatar. Now we're hoping to see what other artists can do with this as we release these tools into the wider world. Together, Unity and Weta Digital will bring these tools to not just VFX artist, but to game developers and artists across industry and overtime, to millions of consumer creators. By putting this new pipeline into the cloud, we will be connecting every real-time 3d device available, creating a unified ecosystem. Not just for gaming and movies, but the metaverse and beyond.

[Luis Visoso]

Wow. Thank you, Marc. That was amazing. As you have heard, Weta is a very strategic, extra big acquisition for Unity. Bringing artists to the Unity platform is fundamental to Unity's vision. We plan to provide professional users a collection of tools, and link them deeply into the Unity platform and also bring to market a set of extremely easy-to-use tools for the growing consumer audience. By doing so, we estimate that we will expand our addressable market by over $10 billion. Specifically, with this transaction, Unity will acquire the technologies and tools, and the 275 engineers that create and maintain those technologies and tools. The purchase price is $1.625 billion. Weta FX will operate independent from Unity, and will continue to develop some of the world's best movies and shows.

Weta FX will be our first customer. Weta FX will license back the technologies and tools that we're acquiring from them. We have signed a 40-year license agreement worth $50 million per year. We expect this relationship between both companies will last much longer than this initial term. In addition, [Indiscernible] FX with contract with Unity for commercial services that we will provide to the engineering organization that is joining Unity as a result of this transaction. The value from this contract is expected to exceed $20 million next year. We also expect this relationship between both companies will last much longer than this initial term. We expect this acquisition to close in the fourth quarter of 2020, as we work through customary closing conditions. The business will be reported on the [Indiscernible] solutions going forward. We do not expect any material revenue or operating impact in 2021.

We will include this transaction in our 2022 guide, which we will share with you with our fourth quarter earnings. For now, I would say that we expected transaction to add over $70 million in revenue next year and have no material impact on our non-GAAP operating income in '22. If transaction does not change our goal to break even on a non-GAAP operating income and free cash flow basis within fiscal 2023. We will fund the transaction with $1 billion in cash and $625 million in equity issued through our shareholders. As of September 30, we had $1.28 billion in cash, cash equivalents and marketable securities on our Balance Sheet, and we have ample access to capital markets. To close, let me reinforce our span on M&A. We do not see M&A as a strategy per se, but as a way to execute our business strategies.

At Unity, we constantly evaluate build versus buy alternatives and make decisions based on the impact to creators and customers, the time to market and cost. While we expect our acquisitions to be can significant contributors to our business, we have not acquired businesses with significant revenue at the time of closing. Instead, we have acquired technologies with great potential. For perspective, in our third quarter, less than 0.5% of our revenue came from acquisitions completed over the last 12 months. With that, let me turn the call over to Richard, who will get us organized and take your questions.

[Richard Davis, Vice President Investor Relations]

Great. Thanks very much, Luis. And so as with past calls, I see some of you have already done that, but raise your virtual hand and I will call on you as time permits. And then please turn on your video when you are called on and then you can turn it off afterwards. Thank you very much. And we'll start with Cash (ph). If you can pop in there, we'd love to hear your questions there.

[Kash Rangan, Analyst]

Sure. Thank you so much, Richard. John, Luis and Marc congratulations on this spectacular quarter. And what an acquisition. John, I'm curious to get your thoughts on the total available market that is available to Unity as a result of this transaction. Can you talk a little bit more about that target market? What are the new opportunities that are accorded to Unity that you cannot pursue before? And a follow-up for Luis. Luis, I know that you've not given guidance beyond the $50 million or $70 million obligated revenue, but can you give us some historical perspective on what was the revenue generation? That was a movie studio, but how should we expect the synergies in this transaction to materialize if John's going to give us the answer on how you expect to reach new target markets. I would assume that it's going to transmit revenues above and beyond the contractually obligated $70 million. Again, talking about that conceptually, that'll be great to wrap it up. Thank you so much.

[LuisVisoso]

John, you're on mute. You're on mute, John.

[John Riccitiello]

I have to say that, thanks, Kash, and I appreciate that 9-part question. We'll do our best to navigate through that. And I'm going to ask Marc to bring up a couple of examples because I think examples actually, in like a picture, are worth a thousand words. So we estimate that what Weta brings to us -- what Weta Digital brings to us, is about $10 billion in incremental TAM, and increases a portion of our total TAM that's available to us in a more addressable -- instantly addressable form. The reason for that, that sort of more instantly addressable form is that artists typically make up, on most game teams, 7, 8, 9 out of 10 people, if you follow me, so 60%-70% of the teams in film, it's even more, and in many, many industries are dominated by artists. They need tools like these.

And so it's easier to draw them across of the Unity platform when we offer something that is essentially the hidden treasure of the artist world. It's what we have with Weta Digital. I believe we can pick up a lot of users inside of the VFX industry beyond Weta or beyond Weta FX. Many others in that industry, it was a huge demand for some of these days. It's directly applicable today to the gaming industry. And it's also directly applicable to a number of our verticals outside of gaming. I'll let Marc pick up on that.

[Marc Whitten, Senior Vice President of Create solutions]

Yes. Thanks, John. So imagine that you are building -- it's like you're -- this is -- we'll start with movies. So you're building a helicopter crashing in a snowy forest after it's been shot down by some armed monkeys. The complexity of the simulations involved in making that happen are enormous and it's what is enabled by these tools. So you could imagine lumberjack in [Indiscernible] can build the trees and simulate the biome. Low-key can stimulate the snowdrifts covering everything ready to be knocked off. It's massively parallel -- elements -- simulations literally have you covered. It can even do the flowing water in the creek, the smoking flame that came down as part of the helicopter. Then you think about the characters that are cover in red hair, they are built from skeletons out.

You've got Kaoru from past multi character performance. You've got tissue for the muscles, you've got barbershop for the hair, again, using the low-key for the simulation of how they work, then you've got a composite that, you've got to be able to coordinate it, all of those come through a set of tools. But the interesting thing is that same scenario with that helicopter also, you can imagine that being used in the game. The same tools being used to create the both simulation, the effects and the ability to use it. Now, in the past, what that meant is 2 different pipelines, 2 different sets of tools, targeting 2 different levels of detail and you'd actually rebuild the effects.

But what we're going to be able to do with Weta Digital, we'll be able to build that into a consistent pipeline that allow you to output at the highest fidelity for both offline or friend, or movies, as well as sort of multiple levels of detail that lets you target the highest in gaming rigs all the way into the highest scale mobile devices all with one set. But it goes much further than that. Imagine that you want to check whether the HVAC system that you're installing in the digital twin of a high-rise building is going to work. Well, it turns out that Loki is tailor made

[Richard Davis, Vice President Investor Relations]

to do that level of simulation and tools like Eddie can actually be used to visualize airflow and simulate it throughout that space. So it's -- even when we think about artists and content creators, it's actually a very, very broad set of people who have never had access to these tools. They've been in the domain of experts, or are in very special tools suites. Suddenly, we're going to make those accessible to across all of those different types of industries.

[Luis Visoso]

As to the other side of your question, it's a little difficult to give you historical revenues because they are not as relevant. So let me let me just repeat a little bit of what I said. We're going to have -- we're going to operate as two independent companies. And Weta FX, as you know, it's a private Company, they are the best in the market. They are actually having an amazing year with new films that we're now disclosing their historical revenues. The revenue that we will get comes from two parts. One is we licensed -- it was back to them, for as I mentioned $50 million per year for this 4 years, which we expect that we'll continue after that. And then we will provide them engineering support worth $20 million per year, which again, we expect to continue to expand.

So how should you model this $70 million? I would expect that that number will continue to grow. Now, as Marc mentioned, we see huge opportunities for us in media and entertainment, in games, having more seats in -- with artists. We believe there is an opportunity in architecture, we believe there is opportunities in automotive. So, many, many different industries where we'll continue to see growth, that the historical revenue growth of Weta is less relevant, to answer that question.

[John Riccitiello]

Just 1 additional thing -- 1 additional thought to toss into the mix. For those of you that have been listening to me from before we went public, or if you listen to our roadshow, one of the points I made was we believe that we can increase potentially our revenue inside of gaming by on the order of magnitude 10X. How is that possible when half the world's games or 70% of the world's mobile games are already built in Unity? And the answer to that question has always been, in large parts, fact is we don't have all the artist on our platform. And this is one of the answers to how we access that marketplace. The artist has the largest audience of creators in the world. And as 3D becomes the norm for consumer-creators, it's going to be a staggeringly large marketplace for users. Now, we don't count all that on our new TAM because we have to bring those consumer-creators into the world, but that is happening now. And this is the first really important step in that direction. Now, SpeedTree helped us, Automatic helps us, Parsec helps us. This is another step in that direction.

[Richard Davis, Vice President Investor Relations]

Thank you so much. Bhavan Dylan, are you available?

[Bhavan Dylan, Analyst]

Hi guys. Thank you for taking the question. I guess first, and I think you touched on it, maybe John too. But thinking about this more holistically, there's obviously been a lot of talk about what the Metaverse could look like. And this really seems like the key enabling technology, at least the development of those type of environment. Maybe can you guys expand upon the thought process and investment around that opportunity?

[John Riccitiello]

Sure. I'll start with that. My colleagues can add a few details, another perspective. But first off, I want to point back that I read Snow Crash when it came out. I guess some of you could see the gray hair, but fascinated about the metaverse for very long time. But the point I would want to make here is that it's only been about a -- 9 months or so that people have been meme-ing about the metaverse. Go back and re-address 1, what we said was a relatively small percentage of content in the world is truly real-time, truly 3D, and truly interactive. What we've said is the majority of content by the end of this decade will be. My definition of the metaverse is pretty straightforward. We've gone from Web 1 to Web 2. Web 1 peck stuff. I had Mosaic and a box. Web 2 enables an Uber, if you will. Satellite data, sell data, tracking information, nap on your phone, it's magic, the car shows up. Web 3 as these experiences become real-time, they become 3D, they become interactive, and often spatially aware.

In Facebook, they call that presence, the sense that you're there or what's there is in your living room. We've been showing lately to folks, "Hey, we can put up -- through [Indiscernible] we can put a sports event on your dining room table. " It's breathtaking. And the answer to your question is essentially thus. Unity expects to be, as industry, after industry, after industry wants to move into the metaverse or become real-time 3D interactive with their presentation, whether it's a car configurator, or a shopping experience. We want to make sure that, 60%, 70%, 80% of the time, that content built by all of those industries and all of those customers is built in Unity. And then the second thing we wanted to do is ensure that more often than not, it's operating in Unity, or on analytics monetization hosting voice toxicity issues, or we are from the operate side.

And what we've said. and I would say if there's been a weakness on our armor, the 1 is it the lion share of the people creating the metaverse are going to be artists. And while you can use Unity to do a lot of things, it's not the best tool to make a mustache. Or get somebody's hair right, or get the environment right. There are other tools for that, and the very most important collection of tools on this planet, was in my industry a little bit like that, that treasure that we fantasize about, that we'll follow map to. All the way in New Zealand inside of a private Company used just for their purposes. I'm frankly stunned, we're able to come to an agreement around something as complex as severing a Company in two and acquiring the tools.

But we were able to do that. We welcomed them to us and it's that that's going to really help us extract and help build the metaverse around the notion that the world is a better place for creators in it. And now, the very many millions of creators in the world that think of themselves as artists, they're welcome on our platform. And we got something that's going to delight them. This really put under our platform something that is, at least from an artist perspective, truly magic. We have the largest tappable audience we have in our universe.

[Bhavan Dylan, Analyst]

Fantastic, thanks for the detail, John.

[Marc Whitten, Senior Vice President of Create solutions]

I'll just add one -- just a quick point on top of that. The magic that the power of the big go after is getting you to -- far towards vision that's in your head before you have to pick up a paintbrush. So it's not about -- when you think about the millions of people are going to have these amazing visions on what they want to create in Metaverse. It's about starting not from a blank canvas, but from something that they can express the type of intent that they want. I want a city, it has a river, I can see it in my head and then watch that grow and evolve. And then they already have where they're trying to go and then go further. That accessibility that brings that power, that procedural artificial intelligence power, to a broad set of people will drive up an extraordinary amount of creativity. I have a strong belief that the metaverse is just going to be made from lots of creative people imagining the future forward, And these tools are going to be foundational for that.

[Bhavan Dylan, Analyst]

Great. Thank you guys. Appreciate it.

[Richard Davis, Vice President Investor Relations]

Thanks. Stephen Ju?

[Stephen Ju, Analyst]

Right. Great. Thank you so much. You talked about the build versus buy decision for Unity but do you think the buy versus build decision that Weta presents to creators in the movie industry will be fairly similar to what the video game industry faces or are there other nuances that we should be aware of? And do you think also that this acquisition will help to skew the decision toward Unity for the games industry, particularly for those who might have made a decision against you? I guess more of a product integration question. And John, maybe this question is -- maybe it's too early, but there is an explicit length between create and operate for the mobile games industry. But what do you think that link between what Weta brings to the table and operate could be outside the games industry if there is one? Do you think you can help creators monetize their content? Thanks.

[John Riccitiello]

Before i start, Stephen thanks for the question and you've now -- it sounds like you've had a microphone in the room where Luis and Marc and I have been talking for the last 9 months because it's the nexus of what you're getting out there is what we're getting out. So, first off, I think not only will we bring the artist onto our platform, this is going to serve as a way to, if you will, build our net expansion rate, because when the artists come to our platform, they're going to bring their friends and they're going to start using the rest of the Unity pipeline, the rest of the Unity platform, including our tools for analytics, and monetization, and hosting, and the rest of it.

We've always been really explicit. I think it was on the last call that I explained that we built net code, and the net code's free, but it's a checkbox to multiply for hosting your game, and that can be a multi-million-dollar proposition that goes multi-million dollars per quarter literally forever, if it's the right title. And so we do a lot of things that are sort of long-term greedy and short-term generous with our user base. And I don't think there's anything that's better in that regard than investing $1.6 billion of bringing these tools to a hungry collection of millions of artist on the platform that want to be part of building in the metaverse and the tools were trapped inside of 1 amazing Company.

Now, Weta is, by far, the leading light in the world of video effects. They've got great artists, incredible artists, they have great vision. They've got Joe Letteri, who's 1 of the greatest visual effects editors in the history of time and the most decorated in the history of time. But they've also done something that I find almost stunning. They've invested well north of 500 for 10 years in building a tool set to do that. In any other world that would've been considered completely crazy. But Peter could afford to do it because he had such a resounding, historic, precedent setting success with Lord of the Rings that allowed him to build what he thought was the right way to do it.

No one in mind -- to my knowledge, has ever tried to do something as gargantuan as putting together dozens of tools with a common data back-end infrastructure with common workflows that resolved to the same scene and the same image. It's -- I mean, Monarch team worked at it -- All the expressions in emojis are mind-blown, but mind-blown, and that we're able to negotiate this transaction thanks to Luis, and the team, and Marc, I'm just thrilled. For them, interestingly enough, they made this incredible collection of tools, a Jewel in the entire of the world of artist, and I think they wanted to be seen. It's like -- this is like one of those 10 lifetime achievement outcomes, and it's hidden in a small town in New Zealand. The output from it is there. There's a lot of win-win here. Now, honestly, we're very -- I don't think we would've been the world's best Company to be a video effects special -- digital domain competitor, etc. They are great so they're going to keep that. We're going to do good -- do what we do best, which is to build on these tools, bring them in the crowd, integrate them deeply with Unity.

They don't always have to use or be creating a real-time 3D game to use this. As Marc had mentioned, it's going to be used for visual twins or digital twins. It's going to be used in the game industry, it's going to be used in the movie industry. It will be used in many, many different ways. Sometimes on bulk, the Unity engine, probably most times, but not all. Marc, do you want to add to that?

[Marc Whitten, Senior Vice President of Create solutions]

No. I think that the key there I think is we're going to make artist superheroes by supercharging their productivity. They will use those in a lot of different ways, sometimes with the Unity engine and sometimes without. But at the same time, we'll be also integrating this more deeply into the Unity engines. We're providing really cross -- deep cross services. I do believe we're going to make Unity itself just a more and more attractive opportunity for people to build great part, whether that's a game or something to doing digital things and certainly in movies and entertainment. I do believe that that adds to expansion as well.

[John Riccitiello]

And there is wonderful financial math behind it. You are right, there are so many explicit linkages between our create and operate tool site. And there are going to be very many explicit connections between this collection of tools, the core Unity engine, what we have in SpeedTree, what we have in Parsec, what we have -- and so what we've been trying to build is a platform, and it's largely there now, where we can hook them with Parsec on a communication service, it works like that. We can hook on with Vivox, when they need voice. We could hook them on Multiplayer, when they're running a game. We can hook them on the engine, when they're trying to develop a game. We can hook them at the artist level, when they are just building out their first visual representation of what they want to do.

We can hook them lots of different ways. And at Unity it almost always seems the same. They start as some sort of experimental customer doing not a lot, and then we get inside and they do a lot more, and then they do a lot more because they write a bigger contract, they start moving more of our services. It sounds -- I'll hate to say this for our customers although they it, land and expand is like endemic to the Unity. It's exactly what we're doing, and there's so much efficiency here, around common data formats and that may not sound like a big deal. It's a gigantic deal to our customers.

[Stephen Ju, Analyst]

Thank you.

[Richard Davis, Vice President Investor Relations]

We'll go to Matt Cost.

[Matthew Cost]

Great. Thanks everyone for taking the questions. I guess just thinking about whether this tools -- what is the level of investment in time and in R&D that's necessary to get the tools ready to license out? And also to work on real-time and interactive applications since those are so core to what Unity brings to the table. And then just on the operate side, obviously a tumultuous time in the ad markets, just anything you can add about puts and takes and what drives -- what drove the slight uptick in growth sequentially in 3Q? Thanks.

[John Riccitiello]

Marc, why don't you take the first part of that question and I'll take the second?

[Marc Whitten, Senior Vice President of Create solutions]

Yes. Well, there's 2 things there. First off, obviously, it's the intent to acquire. We're getting through closing, getting the teams together, and doing a lot of planning. So we'll have a lot more to talk about on our future roadmap upcoming. But one of the most fundamental, because we have talked a lot about the strategy internally around the future of our creation, is this fact that it's a pipeline. And so there's a lot of different things that are needed. Artist is a very overloaded work because there are different types of artists. There are different -- and whether in terms of their sophistication or their type of specialty, or the domain that they're going after. And so individual tools, if they don't work together, if you only have 1 common data model, can be very complicated and not really support getting to the right end results. And so the big win that we get from starting with something like the foundational technology that Weta Digital has is all of these tools are already well-integrated with a common data model.

This data river of all the content flowing through which makes a tailor-made to move towards the cloud and we've spent a lot of time of understanding what it takes to move that to the cloud. And then also to think about how do you move some of those tools towards real-time. Some of them are already there, by the way. Real-time is used quite a lot in pre -visualization, in sort of the ability, the sort of imagine shots before they 're pushed forward. And then also we're very clear on the work that needs to happen to ensure the right level of details, management, and decimation and in some of the other technical ways that drive the same assets to be able to go towards something that's going to be used on a mobile phone or pre -rented overtime. So more to come in the future as we talked about our plans, but an incredible foundation to start with a consistent pipeline that's been built for such a long period of time.

[John Riccitiello]

So on the Operate side and particularly monetization, it -- I'd be remiss if I didn't point out that outside of monetization, the rest of our Operate stock is working extremely well. So it's across-the-board [Indiscernible] of our Operate portfolio, so we're gaining scale everywhere. So we feel really good about our business there. But specifically to Operate, I think topical right now and challenging for investors is, you see a lot of quarterly results and some companies pop up as a winner and some companies haven't popped up as a winner post the roll-through of -- via the pay changes introduced by Apple. Something I've been saying for a very long time is that Unity benefits from a very unique dataset driven by over 3 billion people. MAU in our analytics platform. And hundreds of millions on our IAP platform. I'm going to introduce something that I think -- probably most of you think it's pretty obvious, but I want to emphasize it again. Most ad networks, their business is based on the identity -- the specific identity of the user interacting with the application.

Ours is not. Ours is based on understanding contextually, where they are and what they're doing and what they've done before, and what they're going to do next, using predictive models based on AI, on the 50 billion-plus data as we adjust per day. And as we intimated in the call, nearly a year ago, when we were talking about the early innings of IDFA, we felt that that would lead to a relative competitive advantage for us as 1 advantage for the alternative way of driving modernization. It came in weaker, relatively weaker. And that's exactly what's happened. So I would argue that the puts and takes, it comes down to a really simple thesis.

Ours is a better way to monetize even absent the changes that were introduced by Apple with IDFA and choice are on privacy. And on a relative basis, we gained advantaged all those -- over all those, who use identity, individual identity, they know you and your brother, whose birthday it is. That became relatively weaker and we became relatively stronger and have the single largest data insight based on the largest MAU count for anybody in our world. More or less it played out to a script almost exactly as we'd hoped, but better than we were willing to forecast given how cloudy it was a year ago.

[Matthew Cost]

Great. Thank you.

[Richard Davis, Vice President Investor Relations]

There's a few more minutes left at Brent Bracelin.

[Brent Bracelin, Analyst]

Thanks, Dave. The question here, I guess, John, I wanted to go back to the discussion we've had in the past, a little bit around the technical product and thinking about addressing a larger consumer opportunity -- a prosumer opportunity. I guess my questions here is SpeedTree Parsec, now Weta Digital closer to the artist and directly gets you closer to the consumer, and so maybe, is there an opportunity to democratize some the Weta's functionality into the consumer space, or should we think of a Weta more really as that more technical up-market solution?

[John Riccitiello]

So other people have had microphones in the private room we've been talking. Yours is on my head board, when I'm muttering at night when I got to sleep. Yes, you've spoken to my id, my inner secret mind there with that question, thank you for that. And I'll do my best to answer it straight away. Yes, there's a massive opportunity there. And while we're not going to disclose everything we have planned today, we have a lot of plans here. We are a giant believer that there is a future for Unity with 100 times more users than we have today. And we are working step-by-step, inch-by-inch to getting ourselves ready. And think about for a minute what Unity Reflect is or Unity Forma is. One is that a construction application, and the others are for shopping and for configurators and stuff.

If you want to make a car configurator with Unity, you needed to find a team of people has spent several years learning Unity, and our pull-down menus are nested, nested inside of another nest, inside of another nest complexity, which has a level of fidelity that it's absolutely brilliant if you went to Carnegie Mellon and studied this stuff. And we really do a good job of owning that market. If you think about it, 90% market share for some of them AR VR platforms and 70% of mobile games. That's insane. They make that choice for us for that reason, that level of fidelity. These -- what we call Runtime Applications have 5 buttons and with 5 buttons you got most of what you would otherwise get if you were that high fidelity programmer. And our future is in taming the perfect balance of simplicity and performance.

Think about simplicity and performance. That's my fortune cookie. That's what's written on the other side of my pillow. That's what we're focused on. We're going to continue to drive that relentlessly. Now, the gap in our portfolio, 1 we knew a long time ago, we just didn't have an answer for it. We looked at everything, we just didn't find anything with artists. We now have that answer. The other one was, the world change, and the end of February 2020, we've gone through the biggest change in how we work, in -- literally since the 1950s, and all went home. Look at all of you with your beds behind you. We went home. The world changed in terms of how work is going to get done in the future.

What Parsec brings us is the extreme high fatality capability, to allow people to work literally from everywhere and achieve what they need to, from everywhere, with the simplicity of a tool that was designed for the consumer, to begin with. And so, watch this space. Unity, power, simplicity, and a much larger user base. Stitching together that platform that drives NER on the basis of a incredibly large number of on-ramps and the line to expand behind it. I could rewrite our S-1 around that. It might be simpler than the one we sent you way back when, but that's what we're doing.

[Brent Bracelin, Analyst]

Already John going there, Rich, you've just -- obviously you had interesting kind of idea. And obviously it sounds like you have some stuff here to talk about in the future but great to hear that Weta is part of that consumerization opportunity, as well, longer-term. Thank you.

[Richard Davis, Vice President Investor Relations]

Thanks. We probably have time for 1 more, Tom.

[Tom Roderick]

Okay. Well, perfect. Happy to ask the last question. Thank you for taking it. I guess I will give you all a gold medal in controlling your narrative. It took 51 minutes to even talk about IDFA. I applaud the big picture here. But I think that also speaks to the interest in the big picture from investors and from everybody on this call, right? It's not about what happens next quarter or even 2022. It's really what's happening beyond that. So John, if I kind of take a step back and think of some of the big statements you've made that only 2% of the world's content is made in real-time 3D today, that 50% of all that's built on your platform, that 2% can go to a 50% number within 10 years in terms of content.

I'd love to hear your big picture thoughts for what creates that accelerators? It doesn't seem like it's just a linear function. And maybe Weta is a big part of that by compiling more tools on your platform. But perhaps as a form function item -- forcing function with VR, AR next iteration of what those tools look like, or perhaps it's really just consolidating more tools on your platform that creates this adoption factor that suddenly takes things vertical. Can you give us your sense just when do we get to this point of critical mass, and what's the big picture forcing function?

[John Riccitiello]

So the more tools on our platform doesn't change the trajectory of 2% or 3% becoming 50. What that does, it changes Unity's take rate. Without -- we've doubled our revenue in 24 months, we haven't doubled our market share in 24 months. So we're increasing our take rate as we go along. And that's going to go for a very long time, but there's so much take rate in front of us, it's crazy. And I can walk you through that another time, maybe with a postcard, we can address that. But your question of what's going to be the catalyst for moving us from that 2% or 3% to 50%. And while I -- I tend to roll my eyes with the crazy, sometimes fantastical, definitions of the Metaverse and think that -- can somebody not say that for at least an hour and give me a little bit of relief.

On the other hand, the reality is that it took 2 things and we got them both back. The first thing that's going to take to get there was the hardware infrastructure on this planet, the available compute, the available transport, was -- it needed to be in the arena of 5G and it needed to have people like Gen center and NVIDIA to be successful. We needed to see that plant rise. I am so happy with the power behind the new M1 chip set of Apple 's for example. It needed that because absent that, you can't really power high fidelity real-time 3D at scale. And the hardware requirement that do it now, between cloud compute, transport, CPU s and GPU s, networks, it's all there. The pre -condition for success in this space was already there.

Interestingly enough, over a year ago, we were like the only ones always hyping this notion of the world becoming real-time 3D interactive, etc. Now, I mean, who doesn't talk about the metaverse? And who isn't allocating $10 billion a year to it? If you're a mega - cap. The second thing we needed, like the movie we powered, Lion King, we need all those wildebeest to run down the canyon and do so in this magnificent herd. And guess what, somehow in the last 2 to 3 or 4 or 5 months, it's become a herd. And it's become a herd of companies. You've just listened to announcements in the last week and a half, the companies that have $10 trillion in market cap talking about this. Not bad. It's our [Indiscernible]. I couldn't be more thrilled they're all going to join us.

And as we have always been, they're building vertical [Indiscernible] and we build horizontal to cross-cut them. The taller they go, they take us with them. And I think we've managed a [Indiscernible] -- I have never had more fun at work. I've never been more excited about the prospects for anything I've ever worked on. Because it keeps -- it seems to me like the tailwinds are coming faster than I anticipated them to be. So thank you for the question. It's a fun one to answer. And if you see the world from my vantage point, the wins coming from back there our sales are up and we're picking up the things to both drive increased take rate out of a rising sea that we can lead it. It doesn't get better than that.

[Tom Roderick]

Fantastic. Thank you.

[John Riccitiello]

Thanks, Tom.

[Richard Davis, Vice President Investor Relations]

Well, thank you everyone very much. Sorry we couldn't get to everyone. We're -- I think we're calling all of you all back later on tonight, so you'll be able to chat with us directly. But we tried to get through many, but we had so much good news to talk about, it used up a lot of time. But we'll see you on our next earnings call. Thank you very much, and have a good rest of your week and next few months. Thanks.

[John Riccitiello]

Thanks, all.

[Operator]

The recording has stopped.